by Colin Alexander Storrier
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Let’s take a step back in time. It’s 2015 and Prime Minister Cameron is about to face the electorate. The key message portrayed by the Tories is one of economic competence. We’ve “saved the economy from ruin” writes Cameron in the Telegraph. We are warned that a Labour government would be chaos, dancing to the SNP’s tune, and that they would lead us to economic oblivion. History is rewritten and the global financial crisis forgotten. Bankers and regulators are let off the hook. Instead, the most vulnerable people in this country and the immigrants who have done us the honour of calling the United Kingdom ‘home’ are blamed for our economic woes.
It was high public spending that caused the ‘crisis’, we are told. Our TV channels supported the narrative with sensationalist programmes such as Benefits Street. The Tory message is regurgitated day-in-day-out by a compliant and complicit media. Yet, little attention is paid to Rupert Murdoch’s unfettered access to 10 Downing Street. How many journalists properly scrutinised the corporations and individuals making significant donations to the Conservative Party? The answer is few to none.
“…the Tories used the crisis to start an ideologically driven process of dismantling the ‘state’”
Never to miss an opportunity, the Tories used the crisis to start an ideologically driven process of dismantling the ‘state’. We must give tax cuts to our corporations, we are told. Whilst the Tories simultaneously made savage cuts to our public services and privatised our state assets. To date, the Tories have reduced the tax burden on our wealthiest corporations by almost £60bn; they want to go further!
In 2013, those lucky enough to earn over £150k, benefited from a tax cut of 10%. Cameron himself saved £5,000. If that wasn’t enough support for the rich, quantitative easing unleashed an explosion in asset prices. You don’t need a PhD in Economics to realise that any increase in asset prices will help those who are most likely to own assets – the rich.
How, with all these tax cuts, could the Conservatives possibly restore the public finances to health? It’s an interesting, unasked and unanswered dichotomy. The answer was austerity; the problem is, austerity doesn’t work and hasn’t worked.
In economics, we are taught that the marginal propensity to consume is much higher amongst those on low incomes than it is for the rich. What does this mean exactly? Let’s look at some basic macroeconomics. There are four main drivers of economic growth in an economy: consumer spending, investment expenditure by firms, government spending and the expenditure of residents abroad on our exports. The UK economy is largely driven by consumer spending. Basically, the money that you and I have in our pockets and how much of it we spend on goods and services. The more we spend, the more revenue our businesses generate. The more revenue our businesses generate, the more people they can employ; the more people employed, the more we raise in tax, and so on. Those on low incomes are far more likely to spend their income, providing a boost to economic growth.
“Cutting the top rate of income tax and cutting tax to corporations has little economic benefit”
Conversely, the rich are far more likely to sit on the cash, providing no meaningful contribution to economic growth. That is accepted economic fact and there is empirical evidence to support it. The poorer we make our low-income families, the weaker our economy becomes. Cutting the top rate of income tax and cutting tax to corporations has little economic benefit. In fact, the latter tend to pay out the additional revenue as dividends, to those who hold stocks and shares. Who holds stocks and shares? Mostly, the rich – who in turn get richer – and so the cycle goes on.
Let’s look at the Tories economic performance, using data from the Organisation for Economic Co-operation and Development (OECD) and the World Bank. Central to the Tories long-term economic plan was the reduction of the deficit and the debt. Let’s start there.
Firstly, for those not accustomed to the terminology of debt and deficit, a government deficit arises when a government’s expenditure exceeds revenue. Whereas the commonly accepted definition of debt, is simply ‘accumulated deficits’.
Graph one illustrates the UK budget position from 2000 to 2015 using the latest figures available from the OECD. In the early 2000s, we had a budget surplus position, followed by a modest deficit in each year, prior to the global financial crisis. At the height of the crisis, the public finances deteriorated to a deficit of 10.22%, before starting to recover as Labour left office in 2010.
This is not unique to the United Kingdom. Budget deficits were all the rage in 2008-09. Even prosperous Denmark, Sweden and Finland fell into deficit in 2009. However, what happens next is interesting.
Despite years of austerity, rising inequality and untold misery being inflicted on the population, the deficit was still higher in 2015 (and 2016, not available on OECD figures, but estimated at over 4%) than it was under Labour in 2007.
Reducing the spending power of those on lower incomes has been key to this dismal performance, as demand has been sucked out of the economy.
“even in Labour’s worst years in this sample, they outperform the Tories”
There are many different ways to look at these figures. Let’s be generous to the Tories and take an average of Labour’s worst years. On average, between 2006 and 2010 (Labour left office in 2010), Labour ran a budget deficit of -6.062% as a percentage of GDP. In the next five years, under a Tory government, from 2011 to 2015, without a financial crisis to deal with and with fairly robust economic growth, we have an average deficit of -6.336%. Even under Labour’s worst years in this sample, they outperform the Tories. That’s the deficit; what about the debt?
Not only have the Tories failed to deal with the deficit, they have presided over an explosion in debt. If we use the gross government debt figures, as provided by the OECD, we can again see a pattern. From 2000 to 2006, we have relatively stable government debt, with no material change until the global financial crisis years of 2007 to 2009. Again, this is no surprise; the crisis resulted in many countries increasing their debt to GDP levels. These are ‘gross’ figures and therefore exclude any financial assets in the form of debt instruments. However, we can see that when Labour left office in 2010, the gross position was still under 90% of GDP.
Again, despite fairly robust economic growth, we can see that the debt continues to increase, reaching over 110% of GDP by 2014. The debt continues to rise today. Let’s compare UK debt to Scotland’s peers.
“the UK has the highest ‘gross’ government debt”
Ireland was often cited by the Tories as a cautionary tale for Scotland and a reason why we shouldn’t be independent. Interestingly, you don’t hear that argument as often now. Its gross debt position is lower than the UK’s (down to c75% to GDP in 2016). The UK has the highest ‘gross’ government debt as a % of GDP in the sample. In fact, Norway only borrows to take advantage of low interest rates for investment purposes; its ‘net’ position is positive due to significant financial assets. Scotland of course has similarly sized oil reserves to Norway, but Norway had something better: its independence.
Finally, let’s take a look at GDP growth, using figures provided by the World Bank:
“enter George Osborne and a double dip recession”
We can see that the UK had fairly robust growth in the 2000s under Labour. When Labour left office in 2010, the economy was growing at a respectable 1.9%. Enter George Osborne and a double-dip recession (austerity strikes), and we have growth at a reduced 1.5% for 2011, then 1.3% in 2012, before meeting Labour’s 1.9% in 2013. In fact, it wasn’t until 2014 that the Tories achieved higher growth than Labour in its last year in office.
Fast forward to April 2017. England & Wales have voted decisively for Brexit, in conflict with Northern Ireland and Scotland. Theresa May is now Prime Minister and she has already broken a promise she made many times, by calling a snap General Election to be held in June. This campaign will be different from 2015’s. Less will be said of the economy; the Tories can’t realistically continue to blame Labour for our economic woes, having been at the wheel for the past 6/7 years.
“Do we really want another lost decade under the Tories?”
Make no mistake about it, dark clouds are forming over the economy. Retail sales, a key indicator of the economy’s health, have suffered their biggest fall since 2010. Scotland has also reported weak growth, following the Tories ineptitude at supporting the key oil & gas sector. Inward investment has also fallen since the Brexit vote, with the impact of a ‘hard’ Tory Brexit yet to come. An underperforming economy and a growing electoral fraud scandal, is of course the real reason why May has called a snap election. I’ve demonstrated how the Tories are not ‘fixing’ the economy and are actually performing poorly. Do we really want another lost decade under the Tories?
In business, there are many companies who take the decision to ‘outsource’ their operations to another company in order to achieve greater efficiency. Indeed, ‘outsourcing’ can sometimes bear considerable fruits and cut costs. This is similar to the political arrangement in the EU. Many countries choose to secede a small degree of sovereignty; to make trading with the other EU nations as simple, cost-effective and as efficient as possible. Over 300 years ago, Scotland similarly outsourced key decision making powers to our nearest neighbour, England. In business, if the company providing the outsourced solution performed badly, damaged the business and had an adverse impact on their revenues, then the outsourcing firm would be sacked.
“sack the underperforming Westminster elite and take back control”
After decades of anaemic growth, uncertainty around a Brexit we didn’t vote for, and the accumulation of increasingly unsustainable debts, it’s incumbent on us all to ask the question whether or not we wish to continue outsourcing key decision making powers to the Westminster parliament in London. The alternative is that we make a sensible business decision, sack the underperforming Westminster elite and take back control.
Colin Alexander Storrier is a Chartered Fellow of the London Institute of Banking & Finance. He has studied an MA Politics (Hons), completing research on ‘Public Policy in Scotland, post Devolution’. More recently, Colin has completed in MSc Banking Practice and Management, completing research into the use of ‘Wholesale Funding’ and its impact on economic growth in the UK, US, France and Germany. Colin is currently employed by a top tier UK bank. The views in this article are his own.
The Butterfly Rebellion
Colin Alexander Storrier